Published: July 2, 2013 at 11:02 am

The midstream arm of Anadarko Petroleum Corporation (NYSE:APC), Western Gas Partners, LP (NYSE:WES) and midstream energy firm Enterprise Products Partners L.P. (NYSE:EPD) have formed a joint venture for two natural gas liquid, or NGL, fraction trains. Both of these energy infrastructure firms will become bigger and better in the coming years on the back of the U.S. oil and gas boom. Although I am bullish on these two firms, Enterprise Products Partners L.P. (NYSE:EPD) in particular has outperformed Western Gas Partners, LP (NYSE:WES) and is one of the most lucrative midstream investments at the moment.

The Houston based Western Gas Partners, LP (NYSE:WES) has acquired a 25% stake in the joint venture while Enterprise owns the remaining 75%. The partnership will invest $120 million in 2013 as construction cost.

They have also announced another project for second cryogenic processing train at the Lancaster plant in DJ basin called ‘Lancaster II’. Construction will begin this year while commercial operations will begin from early 2015. The project comes with a price tag of $165 million. Expected capacity of Lancaster II is 300 million cubic feet per day (MMcf/d) while output of 200 MMcf/d is guaranteed by Western Gas.

MLPs: Risks vs. Return

Both Western Gas Partners, LP (NYSE:WES) and Enterprise Products Partners L.P. (NYSE:EPD) are Master Limited Partnerships (MLPs); i.e. they have a different structure as compared to a listed company or a real estate investment trust. MLPs have tax benefits of a limited partnership and are generally higher yielding stocks that distribute nearly all of their cash between their unit-holders.

An average MLP generates a yield of around 6%. In fact, the $7 billion market cap Alerian MLP ETF, a fund which represents the 25 leading U.S listed midstream MLPs, gives a yield of 5.8%. Analysts are expecting around 6% to 7% growth in annual distribution of MLPs. This could easily translate into a total return of around 12% to 14% in a year.

However, there are some risks as well, particularly those coming from changes in tax status structure and increasing interest rates. In short, if President Obama makes the proposed changes to the tax structure of MLPs, then they would lose their coveted tax advantage. However, I believe that such a move is akin to a major overhaul and there are very little chances of this happening in the short term.

Secondly, like most high yield investments, MLPs have typically underperformed during the period of rising interest rates. These corporate entities rely heavily on the capital markets to raise their funds – since they are allowed to keep a very small percentage of their cash with themselves. A rise in interest rates makes borrowing — and investments in MLP — relatively more expensive. Moreover, the greater the investors are concerned about an economy, the poorer the MLPs are going to perform at the stock market.

While in the current business environment, I believe that benefits of investing in most of the midstream MLPs outweigh the risks but investors would make better decisions if they are aware of any potential pitfalls.

The leading MLP Fund

The U.S is now producing more oil and gas than ever before and this output will most certainly increase in the coming years. This will translate into more business for the midstream sector. Both Western Gas Partners, LP (NYSE:WES) and Enterprise Products Partners L.P. (NYSE:EPD) are well positioned to capitalize on this gain. Although I am bullish on both of them as well as the Alerian MLP ETF in the long run but Enterprise Products looks more lucrative now.

Enterprise Products Partners L.P. (NYSE:EPD) is the biggest holding in Alerian MLP ETF with a total weight of 9.53% while Western Gas Partners, LP (NYSE:WES) is the fourteenth largest with a weight of 2.85%. In the past six months, both of these companies have easily outperformed Alerian MLP ETF which has risen by 12%.

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